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LRAD Corporation (NASDAQ:LRAD)

F2Q 2013 Earnings Conference Call

May 8, 2013 16:30 ET

Executives

Robert Putnam - Investor Relations

Kathy McDermott - Chief Financial Officer

Tom Brown - Chairman, President and Chief Executive Officer

Operator

Good day ladies and gentlemen and welcome to the LRAD Fiscal Q2 2013 Conference Call. At this time, it is my pleasure to turn it over to Robert Putnam. Sir, the floor is yours.

Robert Putnam - Investor Relations

Thank you. Welcome to LRAD Corporation’s fiscal second quarter 2013 conference call. I’m Robert Putnam, Investor Relations for the Company. Tom Brown, our Chairman, President and CEO and Kathy McDermott, our Chief Financial Officer are also on today’s call. Ms. McDermott will recap our fiscal second quarter financial results, followed by a brief presentation from Mr. Brown. After the presentation, we will open the call to questions.

Other than statements as to historical facts, statements made during this call are forward-looking statements, and are based on our current expectations. During this call, we may discuss the company’s plans, expectations, outlook or forecast for future performance. These forward-looking statements are subject to risks and uncertainties and actual results could differ materially from the views expressed today.

For more information regarding potential risks and uncertainties, see the Risk Factors section of the company’s Form 10-K for the fiscal year ended September 30, 2012. LRAD Corporation disclaims any intent or obligation to update those forward-looking statements except as otherwise specifically stated.

Before we get into our results today, I want to provide a brief update regarding Iroquois Master Fund’s intention to nominate candidates for election at our 2013 Annual Meeting of Stockholders. The Iroquois nominees are being reviewed by our Nominating and Corporate Governance Committee and they will make a recommendation in the best interest of all stockholders. The findings of the committee, the proxy and the date for the Annual Meeting will be issued in upcoming company communications and SEC filings. As the purpose of today’s call is to discuss our fiscal second quarter results, we have no further comments regarding the proxy contest at this time.

I’ll now turn the call over to Kathy for the fiscal second quarter financial results recap. Kathy?

Kathy McDermott - Chief Financial Officer

Thanks, Robert. Thank you for joining our call this afternoon. Our second fiscal quarter revenues continued to reflect slow U.S. military spending as the effects of sequestration and delays in the passages of fiscal year 20103 continuing resolution are causing spending delays. As Tom will describe, we continue to develop opportunities outside of the U.S. military and we are also beginning to receive some smaller orders from the U.S. military in the current quarter indicating that funding maybe releasing. Based on our strong pipeline of opportunities, we are optimistic that we will have a strong second half.

Revenue for the quarter ended March 31, 2013 was $3.2 million compared to revenue of $2.4 million for the quarter ended March 31, 2012. Year-to-date revenues were $6.2 million compared to $6 million in the first six months of fiscal 2012. Our revenues will continue to fluctuate on a quarter-to-quarter basis based on the nature of our business and customer base and the timing of deliveries.

Gross profit for the quarter ended March 31, 2013 was $1.4 million, a 43% of net revenues compared to $1.3 million or 55% of net revenues for the second quarter of the prior year. Gross profit for the first six months of fiscal 2013 was $2.8 million compared to $3.1 million for the prior year.

The change in gross profit was primarily due to increased revenues offset by unfavorable product mix and higher contracted annual maintenance costs. In addition, warranty costs increased compared to prior year, while current year warranty costs are very low. We recorded a benefit in the prior year, when we reversed an unused warranty accrual for one year warranty period on a large (bond) military sale shipped in March 2011.

Operating expenses for the second fiscal quarter increased $204,000 from $1.6 million to $1.8 million. Year-to-date expenses increased $361,000 from $3.1 million to $3.4 million. The increased expenses are primarily related to legal and other professional fees associated with the lawsuit and threatened proxy contest as well as some increase in non-cash share based compensation expense and research and development costs primarily offset by reduced third-party sales commission.

We reported a net loss of $459,000 or $0.01 per share in the second quarter compared to net loss of $292,000 or $0.1 per share for the second quarter of 2012. For the first six months ended March 31, 20136, we reported a net loss of $550 million or $0.02 per share compared to net income of $22,000 or $0.00 per diluted share for the six months ended March 312, 2012. The increase in net loss was primarily due to the increase in the operating expenses.

On our balance sheet, our cash and cash equivalents balance as of March 31, 2013 was $15.8 million, an increase of $14.9 million from September 30, 2012 to our fiscal year end. The cash was generated primarily by a reduction of accounts receivable of $3.2 million from the high year end balance due to strong fiscal fourth quarter revenues partially offset by an increase in inventory of $1.8 million. The inventory balance increased based on the current sales forecast. Working capital days decreased slightly during the quarter to $21.3 million at March 31, 2013.

Now I’ll turn it back to you Robert.

Robert Putnam - Investor Relations

Thank you, Kathy. I’ll now turn the call over to Tom for a brief management presentation. Tom?

Tom Brown - Chairman, President and Chief Executive Officer

Thank you, Robert. Good afternoon. Thank you all for joining our call a brief comment on the last squarer. As Kathy indicated, our quarterly inventory level is high. We have been requested to deliver a large order to an Asian customer by the end of March. Unfortunately that order was pushed out and we are now anticipating delivery in our second half. So, we’ll rectify the inventory situation by the end of September.

I would like to give you a couple of business update. As I indicated last quarter, we shipped our first order of our mass notification product. The (unit has) been successfully installed in Oklahoma, Japan. Customer feedback is excellent and we have received some additional pilot orders to be installed in other Japanese cities. The Oklahoma installation was done exactly the same way. Small pilot order followed by a larger order so we’re looking forward to some additional business in Japan.

Briefly an update on the agreement with Paier, Beijing Paier technologies. We sign new agreement this quarter. It’s a five year agreement with an additional seven year non-compete arrangement. The working relationship is going to be as follows: we will initially ship finished goods to customers in China as the business grows, we will expand to as semi-finished good assembly operation Paier has a large manufacturing facility outside of Beijing.

If volume grows, we will look at full manufacturing for the Chinese market. All components must be purchases from us. Paier has a strong connection to the Chinese military. In order to penetrate this market, we need local content and local manufacturing. The Chinese market for public safety, navy and coast guard is large. We will take 12 to 18 months to develop this market but we now have a partner that can help us to penetrate it.

We will continue to work with other non-government markets in China with other existing reps but this agreement with Paier hopefully opens up a very large business opportunity for us but again it’s not going to happen immediately but it could happen within the next year. In April, we made a formal presentation to the Indian navy as part of an RFI response. We are anticipating side by side trials in June, July, which should lead to an RFP.

We are also anticipating our first order from the Delhi Police this month to be followed by additional orders this half and this opportunity looks very promising as we’ll move forward and I don’t know if you looked at the website that there have been a number of positive press releases in India regarding this product. Currently one of our business development personnel is in the Middle East and we are working on finalizing a vehicle application for LRAD 500X and hopefully that will be finalized within the next month.

This past quarter, we made some small sales into South America and we are working on new opportunity in Mexico. This region has a lot of potential and we have dedicated business development personnel to develop it. On the domestic front, as Kathy indicated it’s been very slow and there is a lot of reasons for it. Sequestration is the biggest reason as is the slight delay of the continuing resolution, which basically just rolls over the prior year with prior year spending with a small increase.

The military and government departments are still sorting through spending plans and we are starting to see some loosening but that’s been very slow. An update on our programs the U.S. Navy revised the RFP that was issued last year and we responded to the new RFP in March. We are waiting for the Navy to award this contract. We are still waiting for the U.S. Army to change the RFI that was issued in November of 2011 into an RFP. And a positive update on Kongsberg. The Escalation of Force kit will be demonstrated this month to the U.S. Army. We’ve had several trials, demos, and tradeshows but this demonstration is an important step in the procurement process.

As I indicated last quarter we’re working with the government department to implement infrastructure and security at various locations around the world. Our engineers have been working with the integrators on developing a non-lethal security system which will include LRAD products. We are also working with our outside consultants to help move this project along. And if you take a look at our website we have a picture of our 360 on a trailer. We just started to demonstrate this product for Integrated Base Defense applications and had a number of college campuses and police locations.

The clarity and output is outstanding and feedback has been excellent as we have been invited back to demo the product again for Integrated Base Defense. In past years the second half has been our best performing half. And at this time we have our largest pipeline of opportunities, excluding the U.S. Navy and Army opportunities. We’re confident that our business in the Asia-Pacific area we’ll continue to grow in our second half and hopeful that the U.S. Military and Government markets open up.

So Robert with that I’m going to turn it back to you for Q&A.

Robert Putnam - Investor Relations

Thank you, Tom. We will now open the conference call to questions for management. We encourage callers with questions to queue up with the operator as soon as possible so that there will be a minimal lag-time between each caller. Operator, please instruct the callers how to queue up with their questions?

Question-and-Answer Session

Operator

(Operator Instructions)

Robert Putnam

We are waiting for callers to queue up. We did have a question we received before today’s call, they asked please provide details regarding the Exhibition Center of Paier setting up in Beijing.

Tom Brown

Okay. Well we’re going to actually set up two exhibition centers, one will be at their Beijing headquarters and it will include LRAD products, the complete product lineup, we are still debating on whether we put a 2000X or just an RX but we’re working on putting in a complete lineup and we’ll also have a separate lineup at their manufacturing center because they want to demonstrate to the Chinese military that they have the capability to manufacture these products in China which is extremely important for us breaking into that market. So we will have two exhibition centers one in Beijing and one that is outside of Beijing, it’s a couple of hour bullet train ride, that’s probably Mongolia but it’s pretty far outside of Beijing. But that’s - that gives us the opportunity to demonstrate and display our products which we do not have today.

Robert Putnam

Thank you. Operator, please give us the first caller as soon as you are ready.

Operator

First question comes from (Robert Smith). Your line is now open.

Unidentified Analyst

Hi, thanks for taking my call. Any chance guys of developing additional leg through R&D I mean working on something either outlined to the area and away from it?

Tom Brown

Well the one thing that we worked on this past year is this new Mass Notification product; we call the LRAD 360 because it provides sound 360 degrees from the base of the unit. And we’re making some really good progress in this area. The Asian market is opening up and we have a strong partner in Japan that we feel pretty confident that we’re going to grow this business. I have a meeting with them next week and so far the Oklahoma is a major port city for us to get an installation there was a big success. They are also looking at modifying that unit slightly, they’ve made some customer request and our engineers are working on our prototype right now and we feel that Mass Notification is a very complementary market for us and we feel that our technology brings something that’s missing in the market today which is very clear, powerful communication capability, most of these speakers that are in this space were more designed for siren, siren output not clear communication and our product brings that to the table. So we’ve been encouraged, we feel that this market can grow so we feel good about that and we’re going to focus our attention on trying to develop this market a little bit further.

Unidentified Analyst

Is there any numbers you can put on the market opportunity?

Tom Brown

Well we’re hopeful that we’re going to see at least over $1 million worth of business this year. And we’re pushing for increases but for the size of the company that we have that would be a pretty significant piece of new business for us.

Unidentified Analyst

Okay. Thank you.

Robert Putnam

Thank you, Robert. Next caller please operator.

Operator

Our next question comes from (Jonathan Manela). Your line is now open.

Unidentified Analyst

Tom it seems like a decent quarter from a revenue perspective obviously the loss is disappointing. Do you break out in the filing I assume will come out tomorrow, how much is spent on legal as it relates to this lawsuit?

Tom Brown

Well we had some other professional fees in there Jonathan but most of the cost related to the legal and professional line is related to lawsuit but primarily proxy, most of the lawsuit legal expenses were booked last quarter. This was primarily related to proxy contest and it’s a little bit over $300,000 for the quarter.

Unidentified Analyst

Okay.

Tom Brown

So we could have – without those costs we were pretty close to a breakeven.

Unidentified Analyst

Okay. And the quarter sounds pretty positive you sounded pretty positive on the conference call for Q1, you are communicating a largest pipeline outside of U.S. opportunity for the history of the company. At the same time market valuation minus cash is abysmal, is anything – are you doing anything to try to create new investor awareness or trying to bring new shareholders into the company?

Tom Brown

Yeah I think Jonathan to be quite honestly yeah I would like to see a few shareholders move out of the company and that may take some of the pressure off of the stock price. But honestly the thing I’m trying to do is grow the business, if we can bring in a couple of these large orders that’s going to be the biggest I’m going to see it to the problem. And I know that you always have been interested in the Kongsberg opportunity, it’s going to take a while to develop but we’re now making progress as I indicated in my brief comments, we’re making progress, we’re getting in front of the right people inside the Army, guys that make specification commitments and we’re going to be presenting the product this month to them and we feel pretty good about that, it’s going to be us Kongsberg.

So we’re finally getting in front of the right group and we get a determination as to whether we have – whether this thing has legs or not. So it’s very positive in our view and we’re confident, we feel pretty confident that our business is growing and we’ve done a good job outside of the U.S. because the U.S. market has frankly been tied up in politics and bureaucracy. But I feel pretty good about what’s going on outside of the U.S. right now and we feel pretty confident. The only thing is going to be timing, so many things take a little longer to bring home.

Unidentified Analyst

Right. What’s the resistance in say trying to communicate with new investors and trying to bring new base of shareholders into the company, people typically do like to buy and make investments before making these kinds of events happen?

Tom Brown

Yeah no resistance, we will be at the B. Riley Conference this month and I’d be very happy to come back to New York and meet with you guys, I have no resistance whatsoever but my main focus is to try to grow that top-line so that will take care, that just take care of a lot of things, lot of..

Unidentified Analyst

Okay.

Tom Brown

Such growth things but if you…

Unidentified Analyst

Alright.

Tom Brown

I’d be glad to come back and meet you in New York Jonathan.

Unidentified Analyst

I appreciate that. Alright guys, good luck for growing the top-line.

Tom Brown

Thank you.

Robert Putnam

Thank you. Next caller please operator.

Operator

The next question comes from (indiscernible). Your line is now open.

Unidentified Analyst

Hi, gentlemen. Could you give us a little bit more information on what’s being done with college campuses with all the headaches that are out there today within to cover college campuses with some of the opportunity for mass notification? Also in the past there was I believe you mentioned the border security in this early part that’s being made in using the LRADs for border security.

Tom Brown

Well, last this past quarter I met – I was in Washington DC and I met with the border security group it’s only a backup I can get the feedback. I met with border security group inside the Department of Homeland Security. And they have a strong interest in the product but again right now budgets are kind of tight so we’re not seeing any movement on purchase orders. When it comes to college campuses we’ll be at UCLA next week demonstrating our product and it was a request by them we’ve also made some recent sales in to the couple of the other UC campuses UC Riverside and UC Irvine are small so we haven’t made any big press releases on them.

But we’re also working another couple of other college campuses throughout the Texas area so we’re trying to – because have limited resources we’re trying to focus on the big universities within the big states such as Florida, Texas, California where they have multiple campuses that if we can get our foot in one of those campus doors we feel that we can start to grow this business we have put our unit our 360 on a trailer so that it’s movable and we can move it around and demonstrate it because in order to sell those products you really need to get out and demonstrate it, customer needs to hear it to appreciate it.

So we’ve got it out we’re moving around and so we’re going down the East Coast right now to number of college campuses, some campuses are already equipped but there are lot that aren’t and we see this as a potentially good market but again unfortunately a lot of these confidences also kind of catch that so it’s hard to get them to make some big purchases but we are working it and we feel like we’re making some progress by getting some small orders.

Unidentified Analyst

How many sales people do you have out there calling on units being calling on college campuses of the fix moment.

Tom Brown

Right now we have two of our internal sales people are doing it and we have a number of outside reps, we’re working with ADT, ADT has a good mass notification sales team and they like the product so they’re actually with the trailer and the product right now to bring these on the East Coast so relying on some outside third party reps to help sell the product because in total we have 37 employees inside the company and our sales team is only six people but we’re trying to grow this and we’re also trying to grow our sale people now.

Unidentified Analyst

Yeah, one more question. The – your Chinese partner how big they are, can you give some information about them, it’s very difficult to find out anything.

Tom Brown

It’s really difficult to find out any information on this company, they are part of a much larger organization, the Paier Technologies group is a small team that focused on bringing in international products in to China but they are part of a government-owned company that’s very large and very secret so their manufacturing facility is also very large but the team that we’re working with directly is the small piece of that total large organization and I wish I could give you more information but it’s a Chinese government-owned corporation and there is not so much information that’s available.

Unidentified Analyst

You were over there, I believe is that correct?

Tom Brown

Yes, I was I met with…

Unidentified Analyst

You feel confident that this is the right company to for the product and they look forward to some strong business in the future?

Tom Brown

I do. The reason I do is because when I went over to meet with them they brought some of the top military and public safety people in to the room, we had to make a presentation to them and I got direct feedback from them that we like your product but we need to have local manufacturing in order for us to purchase the product and so it wasn’t just a meeting with Paier, it was a meeting with lot of the top Chinese people that made me feel confident that these guys could help us break in to that – that market.

Unidentified Analyst

Thank you.

Robert Putnam

Thank you (indiscernible). Next caller please operator.

Operator

(Operator Instructions) And we do have a – the next question comes from (indiscernible). Your line is now open.

Unidentified Analyst

Thank you so much. I have a quick question about this Reseller Agreement that we signed, was there any upfront payment or any guaranteed performance cost went into that contract?

Tom Brown

No, upfront payment was there – the upfront requirement is that they purchase a complete line-up of products for an Exhibition Center in Beijing and a complete line-up of products for the Exhibition Center in their manufacturing facility and we have no upfront payment but there is a (indiscernible) should the agreement be broken.

Unidentified Analyst

How much is the complete line-up products?

Tom - Brown

Complete line-up products roughly speaking it would be over $0.5 million.

Unidentified Analyst

Thank you.

Robert Putnam

Next caller please operator.

Operator

Next question comes from (indiscernible). Your line is now open.

Unidentified Analyst

Hi, gentlemen.

Tom - Brown

Hi, Justin.

Unidentified Analyst

Hi. I’m just wondering if his company is owned by the Chinese government what – is there any kind of IP protection. And second question is what do we – is the implication that if they’re coming to that meeting and saying we like your product, is the implication that there really is an a competitor in China currently?

Tom Brown

No, Justin unfortunately there were many competitors it’s over there, there are at least eight knock-off companies building acoustic hailing devices in China. And right now they’re getting some of the market, the market really hasn’t developed in China yet the acoustic hailing devices market is still growing and we’re actually selling product in to China today through a reseller that we’ve had through last couple of years, sales have been small but the market is starting to grow and there are number of Chinese companies that have knocked off. The acoustic hailing device is one or two that are basically try to knock us off. So getting a Chinese partner should give us some protection against some of the knock-off companies because having a lot of knock-offs are smaller companies and Paier has a little more cloud so they can help protect our business in China a lot of the companies do that a lot of the companies who partner with Chinese companies to protect their interest.

In terms of IP basically the IP in this space is we have some proprietary IP for our product but it’s very difficult to manage IP overseas the only thing that we can continue to do and I’ve been saying this for while is continue to enhance our product and stay ahead of the game. We do have plans to enhance our product offering and I will probably keep those enhancements in the domestic market so we can try to have some protection but eventually the way the world is acoustic hailing devices the positive things that’s starting to grow around the world and are starting to be more and more of these knockoff companies but their products are inferior so we have to stay ahead of the game and keep trying to grow our market and the LRAD brand name has a lot of value and even as a lot of value in china so it’s a – that’s a very positive that’s maybe a one of our biggest pieces of IP is LRAD because people are very familiar with it throughout the globe.

Unidentified Analyst

Alright. And then as far as the – thanks for answering that, as far as the share price goes is there any I know that some insiders brought in the $1.25 or so and just wondering if there is any interest of $0.95. And also what LRAD, is LRAD is still looking at or not looking at share buyback of some kind.

Tom Brown

So from an insider standpoint obviously our stock prices is extremely low and unfortunately for the most part the insiders are pretty much locked up for eight months for the year through blackout periods we’re in a blackout period right now. But in terms of a stock buyback we had entertained that I’d mentioned in our previous calls we were entertaining a stock buyback and we were talking about that at a higher price, this is a very attractive low price from our stock but we are going through this proxy settlement and probably looking at bringing on some new Board Members. So that would happen we really need to waiting for the new Board gets in place before we can discuss that and see what the – see what the Board says because it would be subject to Board approval.

Unidentified Analyst

Okay. That’s it from me. Thank you.

Tom Brown

Thank you, Justin.

Robert Putnam

Next caller please operator.

Operator

Next question comes from (indiscernible). Your line is now open.

Unidentified Analyst

Thanks for the report guys. It sounds pretty promising but again we’re short on revenues and it’s trending that way and I guess I have a few questions, the first one you commented about although the different knock-off companies in China that my – I guess my thought is if you think that many in China what else do you seeing around the world?

Tom Brown

Well actually around the world we’re not really seeing that many competitors, we do have a couple of companies in Korea and the Chinese the Chinese knock-off companies are pretty much local they’re not looking to expand beyond their local territory I guess they feel that the Chinese market is large enough to support them. They’re right now they’re local the Korean companies they’re also local but we’re also selling into Korea right now because their product is interior and we have made some sales into Korea military. So around the world there are some U.S. companies that we have been competing against that put in competitive bids when we’re dealing with military RFPs but for the most part even though our revenue is small we’re still are gaining from our estimate at least 95% of the market maybe higher.

Unidentified Analyst

Yeah, I guess that was my next – I'm sorry.

Tom Brown

It’s a small market right now.

Unidentified Analyst

Okay. And that was my question it sounds like if you had $3 million in change for the quarter and we’re trending somewhere in the mid-teens and so we see some larger orders then it sounds kind of interesting that there is many people interested in the market but they’re still not generating any revenues or revenues anywhere close to what the revenues are for LRAD?

Tom Brown

Yeah, well I think Joe the thing is there are some large potential RFPs that could put to street and if they do that’s (indiscernible) looking to go after. So I think they’ll stay around until the RFPs come out which could be anybody’s guess whether as for the timing but once they come out if we win them that will I think that will change the competitive landscape, if we lose them that will change the competitive landscape.

Unidentified Analyst

Right. I’m sorry.

Kathy McDermott

We compete more of this by just and with just well do a funds and bureaucracy that we do against other competitors I mean we’re not losing deals so much as just now we’re not winning the deals that are out there yet.

Unidentified Analyst

Right, right. That’s good to hear I guess that was a little concern that there was some inroads being made by others that when this kind of flat revenues progression and that you have to tells us the market where the people are coming in and taking off some of that business from some of your traditional customers.

Tom Brown

I think if we continue to grow our market and then we’ll have stronger competitors but right now we’re more concerned as Kathy indicated with budgets and funding as oppose to competition.

Unidentified Analyst

Right, right. Do you trend on enquiries obviously sales out of results that we see in publicly filed documents but in your business do you trend year-to-year the number of enquiries total value of the enquiries things that are one things that are lost and can you comment as to the relative increase in number of enquiries or is it fair to flat from year-to-year, how do you see that?

Tom Brown

No, we see it going up, as we indicated we – what we track is we do a daily pipeline of business and input from all of our sales people and right now our pipeline is the largest that it’s ever been and we’ll evaluate the capability of that pipeline and we feel again it’s going to be timing but we feel that we have some really good opportunities that are hanging out there and we’re trying to work hard to get them into door but we track pipelines and we build pipelines daily and we do, do comparisons of the pipeline year-over-year, quarter-over-quarter, month-over-month so we‘re tracking our business as closely as we can. And right now, we’ve as I said we have the largest pipeline that we’ve ever had. We just need to turn that pipeline into top line revenue.

Unidentified Analyst

Will do you, I mean, if you consider sales lagging inquires are you seeing it increasing 20% year-over-year, 30% year-over-year let’s say from 2011, 2012 and now 2013 how do you see it trending?

Tom Brown

I probably can’t give you. I’ll look into that Joe. I probably, I don’t want to give you a false answer on that. It’s not something that we - we just track it in terms of total dollars and I know where my pipeline is today but I have to go back and take a look and see what it was a year ago. So, I don’t want to give you a bad answer.

Unidentified Analyst

I understand but I think that would give the shareholders kind of an idea, what to expect from like the baseline business compared to project or large order type business because I can see that when you spread that - spread the inquires out you’ve got more people interested so you are going to be giving a percentage of that business versus the occasional homerun? And then as far as I see it that’s still kind of revenue you are trying to generate quarter-to-quarter something you can pretty much count on in the occasional homerun that you get, when you get a large project or significant order?

Tom Brown

Basically the large project if we can land a large RFP that gives you that five year run rate so that gives you a steady business. So that those big deals, we had one with the U.S. Navy and we’re hoping to get another one from the U.S. Navy but those big deals give you that nice stream of revenues it’s lumpy but its little nice, you are going to get some decent annual revenue and you can play around that. So, those big and unfortunately right now in our business those big deals are extremely important to try to land and build that base of business and then get the those additional smaller orders on top of that to grow the whole top line.

Unidentified Analyst

Right. But do you as far as I ‘m sorry go ahead.

Kathy McDermott

No problem.

Unidentified Analyst

Do you see I guess the other question I had was related to the navy RFP I think you commented that you re-filed or resubmitted something based on some changes they are asking for but you didn’t really elaborate on what those changes were?

Tom Brown

What they did is, they modified the RFP. They had included a number of different acoustic hailing devices of different sizes but they also, they wanted a small as they defined it a small medium large hailing device. They also had a piece in there for a, what we call SRAM card. We sold a number of SRAM cards into the navy and the navy has decided to pullout the SRAM card from the RFP and just focus it on acoustic hailing devices. So, we modified our response picking up the SRAM cards and at the same time we just received small PO from the navy for more SRAM cards. So, I think they are still interested in them but they wanted to pull it out of the RFP.

Unidentified Analyst

Let’s say well, I guess, its good time that they bought them separately because at least that‘s money that’s being spend?

Tom Brown

Yes. So, as we said earlier, we’re starting to see a little bit of loosening up of government spending and hopefully we’ll see something comparable to what we see last year in third and fourth quarter some spending coming through from the U.S. government.

Unidentified Analyst

Okay. It sounds good. Thank you very much.

Robert Putnam

Thank you, Joe. Next caller please operator.

Operator

We have another question from (Jonathan Manela). Your line is now open.

Unidentified Analyst

Thanks. And just a follow-up question you made a comment before when we spoke about the shareholders are wanting to, we’re talking about sort of evaluation and stock pricing we talk, you had mentioned to look at and get some share of that I assume, I would only assume you are talking about shareholders that are putting pressure on the stock selling shares if that is the case is that what you are referring to?

Tom Brown

Yes.

Unidentified Analyst

So, what if a stock buyback is not something that you think it’s in the cards right now wouldn’t it just be a sensible move to approach the shareholder and let’s buy in stock or through move him from the sell-side and the pressure on the position?

Tom Brown

It becomes that piece becomes complicated. But in terms of there are, there are some interested parties that have approached us to see if there are large blocks available and we have put those parties in touch with shareholders that we think maybe willing to go up their position. So, hopefully that will happen through the open market. But we haven’t ruled out a buyback the thing is I have to see what the composition of the board is going to be and there will be a new - we’ve to get approval from whatever that new board may look like. So, especially at this Jon and we’re not going to rule out anything. But we have put some people that have expressed interested in the block of buying out a block of stock in touch with those shareholders and hopefully something happens there.

Unidentified Analyst

Okay. All right. Thanks.

Robert Putnam

Thank you. Next caller please operator?

Operator

We have another question from (indiscernible). Your line is now open.

Unidentified Analyst

Hi, gentlemen. I want to follow-up on something. I think LRAD has a very proven product certainly the military has been using it and I‘m sure they are very satisfied with it. With that in mind, the, the disasters that are happening frequently in Asia tsunamis or typhoons or certainly situations where the public needs immediate notification. Why isn’t there a stampede to roll out your products in some of these Asian countries more than just Japan I understand its one it’s starting there. But why isn’t there was a stampede to get your product out there?

Tom Brown

Well part of the lag is that we just issued the product offering at the end of last year, last calendar year and we’re just rolling it out. So, we‘ve had success in Japan. We had very strong partner that’s looking to roll it out. But we also are working in New Zealand and Australia right now it’s also a strong partner looking at tsunami warning systems and I’m also working with my partner in Thailand.

So, we’re looking at disaster recovery in all geographies but also in the U.S. so we’re working with the National Guard. We sold a lot of products last year through the National Guard and they are also using us for disaster and emergency response. And we’re also talking to the fire agency to see if we can get our products put in there. So, we’re working in these areas (indiscernible) but I hear you I’m not leaving that and in turn, we’re trying to grow this.

Unidentified Analyst

Thank you.

Robert Putnam

Next caller please operator?

Operator

Next question come from Jared Cohen. Your line is now open.

Unidentified Analyst

Just quick question. One you mentioned that your backlog it’s the biggest that it’s ever been. I was just curious over the last few quarters if you can give us an idea of looking at your revenue say this quarter what percentage of that backlog would it represent and looking back at the prior quarters, if you can give us an idea?

Kathy McDermott

Jared its not backlog its opportunity.

Unidentified Analyst

Opportunities all right, there are opportunities.

Tom Brown

It’s our pipeline.

Unidentified Analyst

Pipeline yeah.

Tom Brown

The pipeline right now is, what is it, it’s roughly five times.

Kathy McDermott

Five times.

Tom Brown

Five times current revenue.

Unidentified Analyst

Okay.

Tom Brown

But that doesn’t include the large military pieces of business that are hanging out there. This is just business that we’re working and unfortunately it take long time to bring some of these orders in the door but they are out there and we are pursuing them aggressively.

Unidentified Analyst

Yeah.

Tom Brown

And also looking to continue to growth that pipeline at the same time.

Unidentified Analyst

Okay. All right, thank you very much.

Robert Putnam

Thank you. Next caller please operator?

Operator

The next question comes from (indiscernible). Your line is now open.

Unidentified Analyst

Hi. I want to express, which I have done this to Robert I think it’s a really bad mistake to use your cash capital at this time for buying back any stock. You have got a road up ahead including legal problems and how long it takes you to really get through it profitable I don’t think that should be on the table?

Tom Brown

Yeah I think we need to look at everything and when the stock price is really depressed and we do have some cash that unfortunately we’re not getting a large return on, I’m not looking at a major buyback but we would be looking at if we could reduce the outstanding shares and utilize the cash the excess cash that we have because right now the return on cash is abysmal. But I hear you and we’re not going to do anything in a vacuum, we do have to look at our future cash requirement. But fortunately we do generate we’ve been generating positive cash for the last four years and we hope to continue to do that, this is the tough year but we still feel pretty confident about the second half. So we’ll look at our cash situation and I hear what you’re saying and we’re not going to do anything that hasn’t been fully approved by the Board and will consider all sides to this story.

Unidentified Analyst

A question then as far as this competition that you see over in China ends up with. Can you without enhancing your product even further compete on a price basis with them?

Tom Brown

Yes we can because right now in looking at the Chinese I looked at a couple of different small bids that were out and our product is competitive from a price standpoint. If we deal directly with one third party. Right now if we go through a couple of different sales channels the price becomes little too high to compete but if we deal with one company like a Paier we can be very cost competitive and by being cost competitive we’ll shake up some of those knock-off companies because right now their pricing is much higher than the pricing that we’re selling our product for so – in the U.S. not in China but in the U.S. Our pricing in China right now because of the network that we’re going through is not competitive. But by doing this deal with Paier we should be very competitive because we won’t have as many hands in the pie as we do today. So I think we can be cost competitive and definitely product competitive because our product is far superior to the product that I saw in China.

Unidentified Analyst

Final question it relates to this lawsuit which is obviously costing money but time, invaluable time. Is there anything others, stockholders that are happy with the management can do to help you other than the normal things of voting for things?

Tom Brown

Well I think we don’t want to go into too much detail but I think as Robert indicated we’re trying to come to a settlement and move the company forward and get focus back on just driving the business forward. So hopefully we can come to a settlement within a short period of time and cut off all the expenses that we’ve been incurring and start to just focus on, continuing to try to develop new product and grow this business. So I appreciate the offer but I think hopefully we can get this thing settled and get our proxy out and get our shareholder meeting finalized and move forward.

Unidentified Analyst

Good luck.

Tom Brown

Thank you.

Robert Putnam

Thank you, (indiscernible). Next caller please operator.

Operator

We have another question from (Joe Carter). Your line is now open.

Unidentified Analyst

Alright. First I’d like to start off by saying that I’m not sure what the previous caller was talking about if you have a undervalued asset and you expected it’s going to be increasing in price so of course you want to buy it. And I would hope that this price level this 95% price level is at on – the absolute bottom because I hate to think what would happen if it went lower and beyond that you have at least 4 million shares of committed in warrants and options in the future that are valued higher in the current price.

So if you end up not purchasing shares back on the open market and the price does at some point get high again then you’re just going to further dilute the current shareholders, current ownership. So I strongly encourage you at some point to consider a stock buyback and not further dilute current shareholders’ holdings, that was my comment to the previous caller. And the second thing I was going to ask was with regard to the backlog I didn’t hear the first part of the call but do you have or have you published a backlog I think the caller before – called us before commented about the pipeline of opportunities but have you published what’s your current backlog is as far as existing business?

Tom Brown

We don’t, we do put it out at the end of the year in our 10-K at the end of the year but we don’t do it on a quarterly basis. And we don’t – when we put out a number for backlog it’s actually confirmed orders, we don’t want to put out any artificial, a lot of companies will put out an artificial backlog, very high backlog but we’ll only put out confirmed orders when we put in our backlog log number at the end of the year.

Unidentified Analyst

Yeah I haven’t had a chance to look at the current inventory but I had seen that you had build it up by $1 million into the end of the first quarter I believe and so I thought that, that was based on expected revenues for the second quarter..

Tom Brown

It was..

Unidentified Analyst

And I’m hoping, okay, so I’m hoping that it’s still going to be forthcoming I guess the right term.

Tom Brown

And we are – we’re hoping to see that, we’re hoping to see that order coming in our second half and get a chip before the end of September. But more important I’m hopeful of seeing the order coming in the second half and we feel…

Unidentified Analyst

Okay.

Tom Brown

We feel pretty good about that.

Kathy McDermott

We don’t build product until we’re pretty confirmed that the orders will come, we’re pretty much a make-to-order company because of our size. But if we feel pretty confident and especially as we near year end where there maybe end up here military orders, government orders that we’re hoping for we will build ahead to - based on forecast.

Unidentified Analyst

And I took it as a very positive sign because I had not seen you do that before after you say the end of your fiscal year, I had seen it going into your end of your fiscal year because I know you do get quite a few orders in that fourth quarter period from the military. But I’m I guess I’m confident based on what you’re saying but I’m a little bit skeptical based on the timing of how things have developed. Thank you.

Tom Brown

That’s fair.

Unidentified Analyst

Yep, thank you.

Tom Brown

We are working on it.

Robert Putnam

Thanks, Joe. Next caller please operator.

Operator

(Operator Instructions) And at this time we have no further phone questions.

Tom Brown - Chairman, President and Chief Executive Officer

Thank you for listening to and participating in LRAD Corporation’s fiscal second quarter 2013 conference call. A replay of this webcast will be available in approximately two hours through the same link issued in our April 25 press release.

Operator

Ladies and gentlemen that does conclude today’s conference. We thank you for your participation. You may disconnect your lines and have a great day.

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